EXCLUSIVE: Swindling “investors” in Kazakhstan: when crime pays – and how

EXCLUSIVE: Swindling “investors” in Kazakhstan: when crime pays – and how

“Attracting foreign investments” for a country which holds precious natural resources but fails to capitalise on them is often considered a panacea to make up for the lack of domestic sector capitalisation. But its attractiveness has its downsides as well. Apart from the global establishment in subsoil and related sectors which has pumped hundreds of billions in greenbacks into Kazakhstan in the hope to pump them up again with some extra returns, cowboy entrepreneurs from all corners of the world including most exotic ones have been preying on Kazakhstan’s treasures not with the aim of developing them but to reap cheap cash on them using swindle methods. Among them is a tycoon from Moldova, the richest man in one of the poorest former Soviet republics, who is now getting honoured and rewarded for his misdeeds while his victims are being punished for them. Justice turned upside down…

EXCLUSIVE: Swindling “investors” in Kazakhstan: when crime pays – and how

by Charles van der Leeuw, writer, news analyst

The most recent blow to the very basics of justice in a story that has been dragging on for almost an entire decade came a few days ago with an astounding court ruling against Kazakhstan in The Netherlands. “According to a decision of the Amsterdam District Court, $ 5.2 billion worth of shares were seized in the Dutch company KMG Kashagan BV, which in turn owns a 16.88% stake in the North Caspian Consortium, which is developing the unique Kashagan deposit on shelf of the Caspian Sea,” a news report by the Kazakh newsreel Ratel [http://www.ratel.kz/outlook/v_gollandii_arestovany_sredstva_kazahstanskogo_natsfonda] posted earlier this week was to read. “In addition, as stated in the communiqué of the press service of the company Ascom Group, the Amsterdam court allowed to seize the funds of the National Fund of Kazakhstan, transferred to the management of the Dutch branch of the American bank BNY Mellon, and those of Kazakh real estate in the Netherlands. In Sweden, bailiffs seized shares of the government of Kazakhstan in 33 Swedish companies worth about $ 100 million, as well as the money necessary to pay tax on dividends from these shares.”

The most dumbfounding thing is that Kazakhstan’s assets in The Netherlands have nothing to do with the entire affair. “Court executors rejected requests of the National Bank of Kazakhstan, which wanted to intervene in the process as a third party and demanded to lift the arrest,” the news report reads further down. “The Ascom Group is no stranger to Kazakhstan. Once this holding, controlled by the Moldovan oligarch Anatoly Stati, invested in oil production in the Mangistau region. In 2008, the subsidiary companies of the Ascom Group Tolkynneftegaz and Kazpolmunai faced serious problems with the Kazakh authorities, resulting in the termination of the contract and the imprisonment of the top manager of Kazpolmunai. The latter, however, managed to escape from jail after having stayed there for less than a year and even without having a passport safely reached Moldova.”

“Fair and equitable treatment standard”

The story goes back a long time indeed. “The dispute is based on the Energy Charter Treaty (ECT) and was initiated by Moldovan businessman Anatole Stati, his son Gabriel Stati and two companies owned by them,” a summary posted by the Stockholm Chater of Commerce [http://isdsblog.com/2017/04/04/case-summary-stati-ascom-terra-raf-v-kazakhstan/] posted in early April this year was to read. “Together, the men and their companies owned two Kazakh corporations that invested in two oil and gas field in Kazakhstan. According to the investors, they were subjected to significant harassment from the state, with the ultimate purpose of forcing them to sell their investments cheaply. The harassments supposedly reached from interference with the day-to-day business operations to more extreme measures, such as jailing persons with connections to the companies. According to the investors, the value of their investments were affected negatively by the harassment, which was the state’s intention: the state was hoping to take over the fields and was therefore trying to bring the price down. The investors consistently refused to sell to the state. Instead, they ultimately found an external buyer for the fields – who was supposedly ready to offer substantially more than the state – but that transaction never took place, because the state took over the fields. Therefore the investors initiated the ECT arbitration, arguing that the state had violated the treaty in several different ways.”

What followed was a sequence of arm-twisting and rope-pulling starting with the self-appointed tribunal in Stockholm – which, for all it matters, has no constitutional base either in Sweden or elsewhere. “Kazakhstan claimed that the fields were badly managed from the outside, and also violated domestic law,” the summary continues. “Therefore, the state was forced to step in and save the companies from financial collapse. The state also argued that the corporate chain behind the investment was unclear, which would mean that the tribunal did not have jurisdiction under the ECT. The tribunal found that it did have jurisdiction, and also largely accepted the investors’ arguments. After having gathered extensive evidence, the tribunal found that the state had violated the treaty’s fair and equitable treatment standard. The majority of the tribunal determined that the investors’ losses amounted to some $500 million, which was significantly less than what the investors claimed (one of the arbitrators dissented on the valuation point and considered that the field were in fact worth more than what the tribunal majority found).”

”Possession, custody or control’

Initially, the Kazakh government tried to appeal the ruling by the Swedish tribunal – without the response that had been hoped for. The culprits responded by fixing court rulings outside Sweden to lay their hands on whatever Kazakh state-held assets they could possibly lay their hands on. The first stop was in the USA, but after a New York court in an ambiguous ruling ordered a stay before accepting the Tribunal’s “verdict” and its implementation on a Swedish court order. In England, attempts by Stati & Son to seize Kazakhstan’s state property were even less successful.

“It is the State’s case that at least a large proportion of this equipment had already been purchased, at a far lower cost. The State points to Perkwood selling equipment for US$93 million to TNG that had already been supplied through an arm’s length contract at EUR 28.4 million or EUR31 million, and then Perkwood in 2008 charging TNG a further US$31 million for the same equipment. Thus equipment worth no more than EUR 31 million was ascribed a cost of US$ 124 million,” the English court document dated June 6 2017 [http://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Comm/2017/1348.html&query=(Stati)] was to read.

“In the Arbitration, the Tribunal had upheld a request that the Claimants disclose ‘in so far as in the Claimants’ possession, custody or control’, “documents specifying the cost of construction and assembly operations, start-up and adjustment works in respect of basic facilities of [the LPG Plant]”. Despite this ruling from the Tribunal the Perkwood Contract was not disclosed in the Arbitration by the Claimants. TNG also paid US$44 million to Perkwood as a “management fee”. In the case of this fee there is no contemporaneous record of what management was undertaken. It transpires that Perkwood, incorporated in 2005, from 2006 to 2009 filed accounts that showed it was dormant. In 2011 it was struck off the register of companies and dissolved. The truth is, say the Claimants, that a cost of US$44 million was ascribed in return for nothing.

The documents obtained in the United States Disclosure Proceedings also indicate that US$ 72 million of the figure of US$ 245 million (the total that the Claimants had said was spent on the LPG Plant) was ascribed to equipment delivered but not yet incorporated into the LPG Plant. The State contends that there was nowhere at the LPG Plant where equipment of this value could have been stored. It was common ground that the LPG Plant was almost complete.

Interest on construction costs, in a sum of US$60 million, also formed part of the alleged costs of the LPG Plant. The State makes the point that where costs themselves had not in truth been incurred, interest could not have been incurred.”

No evidence submitted in support

Most striking is that the perpetrators never denied in so many words that they based their claims on irregularities they had committed themselves – neither in public nor in court. The English ruling summed up the arguments brought up by the Kazakh party earlier in Stockholm:

“a. The Claimants sought to justify the price charged under the Perkwood Contract in part on the basis of transportation costs but did not submit any evidence in support of the alleged transportation cost.

  1. The Claimants initially contended that the further US$ 31 million charged under the Perkwood Contract referred not to the same equipment but to spare parts. On the final day of the hearing the Claimants changed their position and submitted that new equipment that would be used to increase the capacity of the LPG Plant was involved, but did not submit any evidence in support of this.
  2. The Claimants did not submit any corroborating evidence to support the proposition that management services were actually performed by or on behalf of Perkwood.
  3. The Claimants did not offer any explanation for what equipment had been purchased for US$ 72 million, where it was stored or how it related to the state of completion of the LPG Plant

In these circumstances the State alleges that the claim by the Claimants in the Arbitration that costs incurred on the LPG Plant were US$ 245 million was dishonest.”

“Based on false information”

In conclusion, the English court decided that to establish alleged fraud is not a task belonging to an arbitration tribunal but to a criminal court within or outside (referring to the Lugano Convention of which the UK is a member as long as Brexit proceedings have not been completed) the jurisdiction where the alleged misdeed has been committed.

“I do not, with respect, believe that the Swedish Court has dealt with the issue of indirect impact (i.e ground (b) under Swedish Law). I wish to add two further points,” the English ruling by Justice Knowles reads. “First, at paragraph G the Swedish Court expresses the view (as expressed in translation) that ‘in a procedure amenable to out-of-court settlement such as arbitration, it cannot be demanded that a party provide the opposing party with information which speaks against the party’s own case’. The view is stated very broadly, and I respectfully admit it troubles me. But for present purposes the view cannot be an answer if the State is correct that the present case is one where the Claimants encouraged the Tribunal to rely on an indicative offer that the Claimants knew was misleading because it was based on false information that they had provided. And further, in the present case the Tribunal expressly required the disclosure of certain documents. Neither party has suggested that the requirement would not include disclosure of adverse documents of the type described in the Tribunal’s requirement (i.e. including the Perkwood Contract). Second, as mentioned, the Swedish Court also reasoned that the KMG Indicative Bid was not (itself) false evidence. That assessment holds at the time the KMG Indicative Bid was made, but I respectfully question whether it still holds when the KMG Indicative Bid is later deployed by a party who knows (but continues to conceal) that it is the product of that party’s fraud.”

“The interests of justice”

In all: Tribunal or no Tribunal, the request to seize Kazakh assets in the UK has been dismissed. “I hold that the decision of the Swedish Court and the decision of the US Court do not create an estoppel, that the State is entitled to rely on the evidence obtained since the Award, and that there is a sufficient prima facie case that the Award was obtained by fraud,” Justice Knowles concludes. “It will do nothing for the integrity of arbitration as a process or its supervision by the Courts, or the New York Convention, or for the enforcement of arbitration awards in various countries, if the fraud allegations in the present case are not examined at a trial and decided on their merits, including the question of the effect of the fraud where found. The interests of justice require that examination. […] The State should have the permission it seeks to amend the English Application. Subject to any development in the proceedings before the Swedish Court or the US Court of which I am not aware, I propose to give directions for trial when handing down this judgment. Recognising the potential for further developments before the Swedish Court or the US Court, there will also be a general liberty to apply. In this particular case the parties should proceed on the basis that the liberty to apply is available, where appropriate, as one means by which the parties may pass any communication concerning the Arbitration, the Award and its enforcement between the Swedish Court or the US Court and this Court.”

So-called arbitration courts

What is at stake here is not just the question whether a legitimate court of law should obey to decisions of a “tribunal” which escapes any sort of constitutional control, set up by private parties with the aim to seek amicable solutions in business disputes. By comparison: no court of law wherever in the world would consider to implement any decision by a referee during a football match if requested to do so. Only legitimate courts of law anywhere in the world have the right to summon parties in legal disputes and compel them to cooperate and accept any verdict ruled in conclusion, including in appeal. Organisations putting so-called arbitration courts empowered with forcible capacities in place should be forbidden to do so by law, and in case of violations of such a law wither prosecuted or dismantled. In any case, states with emerging economies should stop adhering to them.

In the Kazakhstan versus Stati case, it is clear within this context that The Netherlands’ legislators are sitting back, thereby giving the impression that they prefer the country to harbour thieves to legitimate investors. As for Kazakhstan, as long as external investments are needed to make up for the shortage of domestic funding, it should not be a question of attracting investors but rather one of selecting them.